Markets weigh risks of Malaysia Airlines crash

Wall Street reacts to downed passenger jet. Above, trader Benedict Willis uses his moblie phone as he works on the floor of the New York Stock Exchange Wednesday, July 16, 2014. (AP Photo/Richard Drew)

News that the Malaysia Airlines passenger jet went down in Ukraine near the Russian border spooked investors, causing stocks to lose altitude and investors to flock to so-called havens. The flight intensified late following news Israel had launched a ground offensive into the Gaza Strip.

It is not unusual for investors to run for cover when unexpected events — with so many unanswered questions and potential consequences — occur. These are volatile parts of the world, as Ukraine and Russia have been sparring in the area for months, and middle east tensions have been escalating for more than a week.

The initial knee-jerk reaction of investors was dramatic, but stock prices recovered before a late day slide left the stock market near its low of the day. At the close, Wall Street was still trying to determine if the plane was brought down deliberately or whether it was a tragic accident. The plane reportedly had 295 people aboard.

At the close, the Dow Jones industrial average was off 161 points, or 0.9%, at 16,977 after finishing at a new record on Wednesday.

So-called havens, or assets that are more “defensive” during turbulent times, also saw sharp moves.

Money poured into U.S. government bonds. The yield on the 10-year Treasury dropped to 2.46%, down from 2.54% Wednesday.

A closely followed fear gauge, known as the VIX, surged 33%.

Gold also jumped. An ounce of the yellow metal was up nearly $17.10, or 1.3%, to $1,316.90.

Airlines took a hit, too. The NYSE ARCA Airline index was down 2.7%. Shares of Boeing, whose aircraft was being flown when the Malaysia Airlines plane went down, fell 1.2%.

Geopolitical risk often spooks markets, especially in the short term, as investors wait to gather more information and find out exactly what happened, says Gary Kaltbaum, president of Kaltbaum Capital Management.

And news like the plane crash in a part of the world that has been volatile is an event that gets Wall Street’s attention.

“If true (and the plane was shot down), combined with the Israeli situation, there is potential for powderkegs,” says Kaltbaum. “And with the market in the trees (and trading near new highs), there is potential for profit taking. But news will be fluid. If all hell doesn’t break loose, the (decline) should be short-lived.”

The big uncertainty, Kaltbaum adds, is “what could happen next and who could get involved.”

After the close, CNBC reported that U.S. intelligence had confirmed a missile had been fired at the jet.

The latest flare-up and so-called “headline risk” is the exact type of risk investors should be aware of, according to a prescient report released Wednesday night by Scott Wren, senior equity strategist at Wells Fargo Advisors.

In his report, he warned that “event risk” — and the not the trajectory of the U.S. economy — was the biggest risk facing the U.S. stock market. When asked Thursday if a potentially downed passenger jet is the type of unexpected risk that could roil markets, “This is exactly the type of ‘event risk’ I was talking about,” he told USA TODAY. “The U.S. stock market seems to be reacting to this uncertainty … which is only natural. The markets need clarity on just what happened. Uncertainly over an event (and what caused it) usually results in markets trading down. Traders (typically) take a little money off the table, (while they) wait to see what happened.”